Diversification is an investment strategy that involves spreading capital across various financial instruments, asset classes, or markets. The primary goal of diversification is to reduce the overall risk of an investment portfolio. By holding a mix of assets, the negative performance of one investment may be offset by the positive performance of others.
Utilizing diversification can enhance the potential for returns while limiting exposure to volatility. For instance, in many markets, combining equities with bonds and alternative investments can smooth out performance fluctuations caused by economic changes. Investors typically seek to achieve a balanced approach that aligns with their risk tolerance and investment objectives.